Clear Signs of Earnings Growth
The author is an analyst of Shinhan Investment Corp. He can be reached at mj1224@shinhan.com. -- Ed.
1Q21OP beats consensus at KRW444.2bn (+15.4% YoY)
KT posted operating profit of KRW444.2bn (+15.4% YoY) on sales of KRW6tr (+3.4% YoY) for 1Q21, surpassing the consensus estimate of KRW386.9bn by a wide margin. Strong earnings were driven by: 1) growth at both telecom service (mainstay business) and digital platform divisions; and 2) slight recovery from COVID-19 at major group affiliates.
KT net added 785,000 subscribers for its 5G service in 1Q21, bringing the total to 4.4mn. The portion of 5G subscribers for handsets now exceeds 30%. Growth in 5G subscribers drove up wireless revenue by 2% YoY to KRW1.8tr.
IPTV revenue climbed 6.8% YoY to KRW446.2bn, backed by increased SO transmission fees paid by home shopping companies and strong ad sales amid continued growth in subscribers. Revenue from artificial intelligence (AI) and digital transformation (DX) services (internet data center, cloud, etc.) also rose 7.5% YoY, driving up overall B2B earnings. Major subsidiaries such as BC Card reported a rebound in sales, recovering from COVID-19 impact. Their contribution to consolidated operating profit increased by KRW30.5bn QoQ to KRW78.2bn.
Future outlook remains upbeat with clear signs of earnings growth
Operating profit will likely grow 23.9% YoY to KRW1.47tr for full-year 2021 on acceleration in 5G net additions and reduction of capex and marketing expenses. Other positives expected include: 1) slowing decline in fixed-line call service revenue, the main drag on earnings for years; and 2) earnings growth at subsidiaries amid recovery from COVID-19 impact in 2020.
Meanwhile, KT has established KT Studio Genie for content creation and is expanding investments to build an integrated value chain from creation to distribution. The company is enjoying rapid growth in deposits at K Bank, with further expansion expected upon a rights issue within 2021. Mid/long-term outlook further brightens with continuing efforts to strengthen competitiveness in financial data business and create synergy with wireless telecom services (via investments in Banksalad, etc.).
Retain BUY and raise target price to KRW40,000
We maintain our BUY rating on KT and raise our target price to KRW40,000.KT is clearing obstacles in its way to earnings growth amid visible improvement in the mainstay telecom business. This should lead to a rise in enterprise value. We also expect to see an increase in DPS, with 50% of standalone adjusted net profit set to be paid out as dividends.